Company declares a proper dividend out of current profits. Credited to directors loan account to draw on over the next few months.
Within a month, the company goes under and profits take a plummet, and losses from that period eat into the prior profits on which dividends were drawn.
Company closes, and director never receives some of the dividends that were declared as the company doesn't have the money.
If the director is a higher rate taxpayer, are they still liable to the tax on the whole divi declared, or can they only declare the part that they actually received? Is there any proper process that needs to be gone through, and do the amount of dividends need adjusting in the books of the company, or will it be shown as an outstanding liability on cessation?
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Has the div not been paid
by putting it to the loan account, so what is lost is not the div, but the balance on the loan account.
Just thinking out loud here BTW.
Yes - fully taxable
On the assumption that there sufficient distributable profits at the time of the declaration of the dividend , and there appears to have been from the question, then the dividend is correctly declared and therefore taxable. As always, where tax cannot be paid, you might approach HMRC for some form of concessionary relief but it is unlikely to be granted.
It would be worth reviewing the computation of the distributable profits to ensure that all known liabilities at that point were included. Doistributable profits does not equal cash in bank, as is commonly thought by many small businesses. Was tax provided on the profits to the date of declaration?
If there were grounds to reduce/cancel the dividend you would then have to consider:-
a) to what extent the dividend has to be reduced;
b) what would be the consequences for the director if the dividend was reduced - is he in a position to repay the illegal dividend to the company?
c) would external creditors be entitled to receive part of the money to be repaid?
d) by drawing from his loan account in the last month of trade has the director made an illegal preference - once there is a loan account he has no priority over other unsecured creditors
Dividends
Thanks both
@ACDWebb - yes. That makes perfect sense.
@Richard B
Can one reduce a dividend already declared? If so, how? By resolution of the shareholders? To put a spanner in the works, one of the shareholders (there were 2) exited the company (directorship and shares) shortly after it got into difficulty. Therefore only one person remains to potentially alter a decision made jointly.
If the dividend were reduced:
no effect on external creditors, all were paid, the only creditors are 2 equal DLAsDLA bals would be reduced to zero; dividend put DLA in credit by a good amount - no overdrawn DLAs in this company
Dividend was correctly declared on management accounts including tax provision. The only thing that could be argued is that, as the company was a going concern at the time, no provision was made for liabilities that were wholly contingent on the company going bust; there was no sign that the company was going to go bust until it did and had the company carried on trading there would have been no liabilities and therefore they weren't recognised in the accounts.